Central banks use communication to influence inflation expectations, with varying effectiveness. This column examines how professional forecasters and households respond to inflationary pressure warnings in the US. While professionals factor in the Federal Reserve’s policy response, revising expectations downwards, households place less weight on the central bank’s response to inflationary pressures. As a result, their expectations rise when members of the Federal Open Market Committee communicate concerns about inflation. This divergence may hinder the Federal Reserve’s ability to stabilise inflation and anchor expectations, highlighting both the importance of communication and the potential for improving it.
Policymakers increasingly rely on communication as a key tool to shape the expectations of households, businesses, and financial markets. It is often argued that central banks should engage not only with financial market participants but also with the general public. However, this broader objective presents significant communication challenges. While financial markets are generally responsive to central bank announcements (Gürkaynak et al. 2005, Blinder et al. 2008, Swanson 2023), non-experts may not be listening. And even when they do pay attention, there is a risk they might misinterpret the message – leading to unintended consequences such as distorted spending decisions (Gorodnichenko et al. 2021).
In Granziera et al. (2025), we study the response of professional forecasters and households’ inflation expectations to nearly three decades of Federal Open Market Committee (FOMC) speeches. This analysis allows us to assess how effectively central bank communication influences these two distinct audiences. Speeches that warn of rising inflationary pressures lead both households and professional forecasters to raise their inflation expectations. However, only professional forecasters seem able to recognise when a speech comes from an inflation-averse FOMC member (a ‘hawk’), who is more likely to advocate a forceful policy response and accordingly lower their expectations.
Decoding Fed speeches: Delphic versus Odyssean signals
When central bankers talk about the economic outlook, their words can convey different types of information. One type, often called Delphic communication (after the oracle of Delphi, pronouncing what is to come), informs the public about the central bank’s view of future economic outlook without a firm commitment to policy (Campbell et al. 2012, Melosi 2016). By contrast, Odyssean communication involves a commitment to a future policy action (as in Odysseus binding himself to the mast).
In practice, central bank communication often contains both elements. We aim to disentangle these two effects – information about economic fundamentals (Delphic) and information about policy intentions (Odyssean) – by analysing FOMC speeches and the differential adjustments in inflation expectations of professional forecasters and households.
For instance, if a policymaker warns that inflation is likely to rise, agents might reasonably infer that future inflation will indeed be higher. This tends to raise inflation expectations – an outcome often observed when central banks discuss potential inflationary pressures without explicitly committing to counteracting them. An Odyssean signal, by contrast, involves a policymaker strongly indicating that the central bank will act to rein in inflationary pressures – for example, by hinting at upcoming interest rate hikes. If credible, such signals can temper inflation expectations by conveying that the central bank will not allow inflation to get out of control.
We analyse nearly three decades of FOMC speeches and use textual analysis to construct a novel index called Inflationary Pressure Index (IPI), shown in Figure 1. This index measures the intensity with which Fed officials talk about current or upcoming inflation, calculated using a scored dictionary consisting of additive and subtractive modifier terms, which are applied to each inflation-related sentence. Not surprisingly, IPI closely moves with realised inflation, as shown in Figure 1.
We find that when the Fed talks up inflationary pressures, expectations rise in tandem (Granziera et al. 2025). In months when Fed speakers – as a group – devote more attention to looming inflation, both households (as measured by the University of Michigan Survey of Consumers) and professional forecasters (from the Survey of Professional Forecasters) significantly revise their inflation expectations upward. In other words, the Fed’s inflation talk has a clear Delphic effect on the public: it reinforces expectations of higher inflation.
Figure 1 Inflationary Pressure Index (IPI) derived from textual analysis of Fed speeches
Notes: Chart displays the monthly IPI (blue line, left axis) alongside year-over-year (YoY) CPI inflation (green line, right axis) from 1995 to 2023.
Central bankers, however, typically do not stop at diagnosing inflation; often, they also explain how they intend to respond. Our study shows that a key aspect is whether the audience picks up on the Odyssean pitch of the Fed’s speech. To gauge the Odyssean pitch of speeches, we use textual analysis to construct a second novel index called Hawkishness Index (HI), shown in Figure 2. This index measures each speaker’s tendency to emphasise inflation (promoting price stability) relative to unemployment (promoting growth). A higher value indicates a more ‘hawkish’ speaker – one with a stronger anti-inflation leaning or, in practice, a willingness to raise rates to fight inflation (as in Hack et al. 2023). We then examine what happens when high inflationary pressures are communicated in an environment where the overall level of hawkishness among actively speaking Fed officials is also high. In principle, this combination should strengthen the Odyssean orientation of Fed speeches during that period: inflation is rising, and the Fed is likely to respond aggressively.
Figure 2 The Hawkishness Index
Notes: The Hawkishness Index (HI) tracks the Fed speakers’ leanings (higher values mean a greater focus on inflation versus unemployment in their communication). The figure shows the aggregate HI of active Fed speakers each quarter from 1995 to 2023 (standardised to mean zero). Higher spikes indicate periods dominated by inflation ‘hawks’. Our analysis uses this index to proxy the strength of Odyssean signals in speeches.
Our findings reveal a stark asymmetry between households and professional forecasters in parsing these signals. Professional forecasters, who are generally more attentive and knowledgeable about Fed policy, respond to Odyssean cues. When an inflationary-pressure warning (high IPI) comes from a more hawkish Fed (high HI), professional forecasters moderate their expectations of future inflation – sometimes even revising them downward – relative to a similar warning from a less hawkish Fed. One interpretation of our findings is that professionals interpret the hawkish message as a credible commitment that the Fed will counteract rising inflation.
By contrast, households show no such Odyssean response. When they hear talk of higher inflation, they tend to raise their expectations regardless of any communication about the policy response. The subtle cues about the Fed’s likely reaction – which professionals discern – appear lost on the average household. For the general public, the dominant effect of Fed communication about inflation is Delphic: it tells them prices might rise, and they expect accordingly.
This differential response in expectations between professional forecasters and households aligns with the predictions of a simple theoretical model presented in our paper (Granziera et al. 2025). Specifically, we show that rational, informed agents – who are able to understand that central bank communication reflects the complexity of its monetary policy strategy to control inflation – lower their inflation expectations following hawkish messages. In contrast, less sophisticated agents – who fail to connect communication with the central bank’s anti-inflation strategy – raise their inflation expectations in response to the very same hawkish signals meant to underscore the central bank’s commitment to fighting inflation.
Same speech, different takeaways
This divergence highlights a key asymmetry in how different audiences interpret central bank communication. Households and less sophisticated economic agents mostly hear the ‘what’ (i.e. inflation is coming), but not the ‘what will we do about it’ (i.e. the Fed will fight inflation). Professional forecasters, on the other hand, incorporate both elements and adjust their expectations by balancing the signal about rising inflation with the anticipated policy response. Figure 5 in our working paper (Granziera et al. 2025) illustrates this bifurcation clearly: after a hawkish Fed speech, households exhibit only a Delphic revision of their expectations (inflation outlook rises), whereas professionals exhibit an Odyssean revision (inflation outlook falls in light of the expected policy reaction).
From a policy perspective, this matters because well-anchored expectations are crucial for effective monetary policy. If households only take away ‘inflation is going up’ from central bank communications, and miss the reassurance that the central bank will react, inflation expectations could become more volatile and less anchored to the target. That, in turn, can make it harder for the central bank to achieve price stability.
Communicating to a broader audience
Central banks, including the Fed, have increasingly recognised the importance of reaching broader audiences – not just financial markets. Our findings suggest that these broader communications have not always produced the intended effects: households tend to raise their inflation expectations when FOMC members discuss current or future inflationary pressures, regardless of efforts to articulate the Fed’s policy response in those speeches. As Coibion et al. (2022) suggest, direct and straightforward communication may be essential to cutting through the noise when engaging with the public.
In sum, our findings highlight both the power and the limitations of central bank communication. Words alone can and do move inflation expectations, but not everyone interprets words in the same way. Effective communication requires that households hear not only the warnings – the Delphic elements – but also how the Fed intends to respond to them – the Odyssean commitment to a forceful and timely response to inflation. Ensuring that both messages are understood is essential to keeping inflation expectations anchored. In the long run, credibility earned through clear and consistent communication can become a powerful asset in the pursuit of low and stable inflation.
Source : VOXeu
